Octopus launches new electric car ‘salary sacrifice’ scheme

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Octopus launches new electric car ‘salary sacrifice’ scheme

Octopus Electric Vehicles has revealed a new 100 per cent electric car leasing service for businesses looking to become more environmentally friendly.

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Octopus Electric Vehicles has revealed a new 100 per cent electric car leasing service for businesses looking to become more environmentally friendly.

The scheme, called Electric Dreams, uses a system known as ‘salary sacrifice’ which allows staff to pay for a new electric vehicle out of their gross salary, potentially saving them thousands of pounds on national insurance and income tax.

The firm said it is introducing the programme in response to a surge in interest in electric vehicles from businesses.

Huel and Purplebricks are two large firms who have already signed-up, with more than a hundred new enquiries every week according to Octopus, which had Prime Minister Boris Johnson visit its London headquarters late last year.

New: Octopus Electric Vehicles has launched a new salary sacrifice scheme for businesses

New: Octopus Electric Vehicles has launched a new salary sacrifice scheme for businesses

The launch comes as EVs reach a tipping point thanks to falling cost, government incentives and changing attitudes towards zero emission vehicles. 

Octopus has been providing salary sacrifice for the last year but only as a broker for other leasing companies. 

But it is now its own dedicated leasing company, meaning it will own the vehicles themselves.

This is Money takes a look at Octopus Electric Vehicles’ new programme and explains exactly how salary sacrifice schemes work.

What is a salary sacrifice scheme?

Essentially, salary sacrifice means employees agree to give up part of their salary in exchange for a benefit, in this instance the benefit is a ‘green’ car.

There are already many similar cycle to work schemes in place where workplaces provide their employees with bikes to get to and from their office.

Employees will pay a fixed monthly cost for the vehicle which is made using their gross salary which is their income before tax or net salary plus their national insurance and income tax. 

Employers will first rent an electric car from a supplier with the employee then given the option to rent this car in exchange for a part of their salary. 

The will usually be maintained by a third party chosen by the company if it opts for a fully maintained contract which typically includes routine services, repairs and MOT tests. 

Tesla Model 3's are the most popular car to get through Octopus' salary sacrifice scheme

Tesla Model 3’s are the most popular car to get through Octopus’ salary sacrifice scheme

How will Electric Dreams work?

Electric Dreams aims to support the growing number of employees looking to go electric using salary sacrifice which could ultimately help them save thousands of pounds on both national insurance and income tax.

Octopus Electric Vehicles’ new scheme gives employees access to every EV on the market with a range of over 100 miles – of which there are over thirty, up from just five in 2017. A further 20 more models will be available later in 2021.

It is available to all businesses – particularly those with fewer than 1,000 employees which may struggle to access similar schemes.

It provides everything businesses and employees need to go electric in one place – including EVs, home and workplace chargers, smart energy tariffs to keep bills low, and impartial expert advice on going electric.

Drivers that order an EV through Electric Dreams before July 2021 also receive a free smart charger fully installed by the Octopus Energy Services team.

In addition, 8,000 free miles of green electricity with home energy from Octopus Energy – enough for an average UK driver to drive for free for a year.

Octopus Electric Vehicles continues to offer business contract hire leasing packages as a broker.

One of the reasons Octopus has decided to start the scheme now is thanks to the low company car tax rates on EVs which can make them a hugely beneficial option for those looking to help the environment.

Full electric cars are exempt from Vehicle Excise Duty but drivers still have to pay Benefit-in-Kind tax if you are going to run one as a company car.

However, for the 2020 to 2021 financial year, the BiK rate for zero-emissions company cars was just 0 per cent meaning there was nothing to pay until this month, at which point it goes up to just one per cent. 

It will rise to 2 per cent over the next three years. By comparison, combustion vehicles are subject to a typical BIK tax of 25 to 35 per cent.

There has been a surge in demand for EVs as people become more environmentally conscious

There has been a surge in demand for EVs as people become more environmentally conscious

How many people are taking advantage of the scheme?

So far, 141 companies have signed up to salary sacrifice with Octopus, making it available to 22,298 employees.

Some 15 companies are already live on the scheme, including Huel and Purplebricks, making it available to 1,491 employees across the UK.

At present, the most popular car ordered is the Tesla Model 3, which was also the fourth best-selling new passenger vehicle in March

How much will it cost?

The overall process is meant to be cost neutral for businesses as they can recover VAT and also save as they make lower National Insurance contributions due to the salary sacrifice – both are used to calculate the employer’s gross sacrifice. 

Octopus said many drivers are saving 30 to 40 per cent and some up to 60 per cent. 

For example, for a 40 per cent tax rate payer opting for a Tesla Model 3, the typical net cost for an employee is £435 every month with the gross sacrifice from salary coming in at £726 per month.

This provides savings of £290 per month, inclusive of income tax and national insurance with just £14 in BiK tax and equates to savings of £13,920 over a four year period. 

Inclusive of this is insurance, servicing and maintenance and ‘generous’ early termination terms for the business should the employee leave. 

The above example relies on the motorist driving 8,000 miles a year for four years and also makes the assumption that the company is eligible to recover VAT – 50 per cent on Finance and 100 per cent on Services. 

It also assumes the employer wishes to reflect any net savings they made in National Insurance by reducing the gross sacrifice so an adjustment of 10 per cent has been made. 

In this case, the company pays £745.41 plus an unrecoverable VAT of £53.19 which equals £798.60.

The sacrifice the employee makes out of gross salary is £726 which, after tax, is equivalent to paying £435. 

The company saves £53.19 on National Insurance meaning it is cost neutral for them. 

The Nissan Leaf is one of the most popular electric vehicles currently leased by Octopus

The Nissan Leaf is one of the most popular electric vehicles currently leased by Octopus

Which are the most popular EVs?

Tesla is still one of the most popular electric vehicle leased through Octopus EV but its share dropped from 50 per cent to 28 per cent from the first three months of 2020 compared to the same time frame this year. 

However, Nissan now has a share of 31 per cent compared to 22 per cent last year whilst Audi’s have a share of five per cent, up from three per cent in 2020.  

KIA, Polestar, Mercedes, VW and Porsche also all have a share. 

Why is it launching now? 

The launch of Electric Dreams comes exactly one year on from the UK Government’s move to eliminate BIK tax for employees taking an EV via salary sacrifice.

The move instantly made an EV financially much better than a petrol or diesel equivalent, leaving drivers with savings on income tax and national insurance.

Electric vehicles are also increasing in popularity with March the best single month for sales of new zero-emission electric cars on record, beating last December by less than 100 sales, according to figures from the Society of Motor Manufacturers and Traders (SMMT).

Fiona Howarth, chief executive of Octopus Electric Vehicles, said: ‘Salary sacrifice makes electric cars a no brainer – making them significantly cheaper than their petrol or diesel counterparts.

‘With incredibly low company car tax rates on EVs, demand has never been higher – almost a third of employees want the option of an EV as a company car and our own enquiries from businesses have risen seven-fold in the last year alone. 

‘Salary sacrifice is essentially a zero-cost, zero-effort tool for businesses to fight climate change and save the planet. 

‘If just 10 per cent of UK’s employees switched to electric – we could decimate CO2 emissions of cars, while collectively saving almost £4billion per year.

‘We are thrilled to see so many customers offering our service to their employees already and the signs are that many more will sign-up in 2021.’

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